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August 26, 2014

Is Warren Buffett a Hypocrite on Taxes?

Applying the Buffett Rule to corporations would seem to preclude the Burger King deal the Berkshire CEO is planning to finance

Warren Buffett. (Photo: AP)

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Hold the pickles, hold the lettuce, special tax deals don’t upset us.

Not, at least, Warren Buffett, who is expected to finance 25% of a $10 billion corporate “inversion” wherein Burger King takes over Canadian coffee and donut chain Tim Hortons and the U.S.-based acquirer moves its headquarters to Canada, where total tax costs are 46.4% lower.

Buffett’s involvement in the deal is sure to intensify an already heated debate about the propriety of inversions, given the billionaire investor’s consistent public stands against the wealthy evading taxes.

While Buffett has stood shoulder to shoulder with President Barack Obama denouncing a tax code that allows him (and the president) to pay a lower effective tax rate than the CEO’s secretary, the Burger King-Hortons deal would seem to be a grander corporate version of tax avoidance. Accusations of hypocrisy are already resoundingly heard amongst the political and media commentariat.

The president has long backed the now ironically named Buffett Rule, never enacted by Congress, but which would impose a minimum 30% effective tax rate on the wealthy so they could not utilize loopholes to reduce their tax bills.

A corporate Buffett rule, if it existed and could withstand legal challenges, would block inversions, by which a U.S.-based corporation’s acquisition of a foreign company allows the acquirer to change its legal domicile and thereby legally avoid paying the higher U.S. corporate tax rate.

The tax arbitrage move gained notoriety in the spring when Pfizer tried to buy U.K.–based AstraZeneca.

Had the deal gone through, the New York-based pharmaceutical giant would have seen its 42.1% effective tax rate (based on a 35% federal rate plus state rate of 7.1%) plummet to Britain’s 21% rate, thus saving the firm $1.4 billion a year.

The ultimately doomed move stirred a hornet’s nest of controversy, with liberal politicians and pundits branding the firm and its corporate imitators wealthy tax evaders, while conservative critics insisted the inversion trend merely highlighted the need to lower the U.S. corporate tax to a more competitive rate.

For its part, the White House has called on the Treasury Department to come up with new rules that curb the practice, but potential legal hurdles to doing so must be resolved, and the process may take months.

Gregory Valliere, a political strategist whose Potomac Research Group provides Washington policy analysis to institutional investors, recently told subscribers of the firm’s newsletter that the White House was probably not bluffing, i.e., using it merely as a campaign issue but without seriously attempting to stop inversions.

Wrote Valliere:

“Our source believes that Treasury tax experts are compiling a list of options—focused largely on tax breaks stemming from the treatment of debt taken on by U.S. companies in inversion deals. (Curbs on government contracts for companies that invert would be much more difficult to implement.)”

If the trash-talking of inversion deals in the past month was meant to discourage new ones from sprouting, Obama’s Omaha ally was undeterred, exposing the Berkshire Hathaway CEO to charges of hypocrisy.

Amid the storm of controversy during Pfizer’s takeover attempt, Buffett, in an interview with CNBC, criticized tax inversions, but in a nuanced way, leaving room to interpret whether his financing of the Burger King deal is hypocritical.

“I’m not saying they’re doing anything illegal at all in following the rules on inversion. I would personally change that part of the law.”

The quote suggests that Buffett considers inversions wrong, but seems also to acknowledge that corporations availing themselves of the maneuver are within their rights to do so.

But other policy advocates, particularly of a conservative hue, insist that the U.S. government alone is responsible for choosing a rate of taxation that is onerous.

According to data from the Tax Foundation, the U.S. corporate tax rate is the highest among developed nations, averaging 39.1% (factoring in the average state tax rate on top of the federal 35% assessment).

On the other extreme, Ireland’s rate is just 12.5%, and the rate is 21.1% in Switzerland, where drugstore chain Walgreen Co. recently withdrew under a barrage of customer criticism its bid to reincorporate.

Beyond the rate of taxation are concerns about how the U.S. levies taxes. Corporate tax reform advocates say that U.S. system of worldwide, rather than territorial, taxation places the U.S. at extreme disadvantage.

As a Manhattan Institute paper put it: "If an American company operates in the United States and Switzerland, its domestic affiliate pays U.S. taxes at 35%. But its foreign affiliate pays U.S. taxes at 35% and Swiss taxes at 8.5%, putting it at a disadvantage vis-à-vis its foreign competitors."

That, critics say, is tantamount to unfair double taxation, requiring U.S. corporations to pay taxes on earnings both in the country where profits were actually earned and again to the U.S. Treasury.

The IRS permits corporations to deduct taxes paid to foreign governments; however, as those rates are invariably lower, U.S. corporations are unable to take advantage of lower-tax jurisdictions even in instances when their sales took place there. That, critics say, makes U.S. corporations less competitive in markets where their rivals pay a lower effective tax rate.